Silver Seen Helping Zinc

July 25, 2013 at 09:34


The bear market in silver is poised to turn around the fortunes for zinc as miners reduce production and end the seven-year glut in the industrial metal.

Silver makes up 40 percent of the value of byproducts from zinc mining and helps reduce costs for mineral companies, HSBC Holdings Plc says. Its 33 percent slump in the past seven months added about $130 a metric ton, or 7 percent, to average zinc production costs, according to CRU, the London-based research company. Zinc demand will exceed supply by about 4,000 tons in 2014, from a 44,800-ton surplus this year, the average of 14 analyst estimates show.

Companies from Terramin Australia Ltd. (TZN) to Yukon Zinc Corp. said they are curbing unprofitable operations. Prices will rise 3.6 percent to an average of $1,952.50 in the fourth quarter and $2,000 in the following three months, according to the median of as many as 14 analyst estimates. Silver fell as investors lost faith in precious metals as a store of value. Citigroup Inc. is forecasting the lowest annual average in five years in 2014.

“A falling silver price effectively raises the cost curve in the zinc industry,” said Andrew Keen, the global head of metals and mining equity research at HSBC in London, who has covered metals markets for more than two decades. “It doesn’t have to fall as far as it used to to trigger closures of mine capacity.”

Zinc fell 9.4 percent to $1,884.50 a ton on the London Metal Exchange this year, the smallest drop of the six main metals on the bourse. Aluminum went into a bear market in 2011, followed by copper in April and nickel, lead and tin in May. The Standard & Poor’s GSCI gauge of 24 commodities fell 1 percent since the start of January and the MSCI All-Country World Index of equities climbed 10 percent. A Bank of America Corp. index shows Treasuries lost 2.8 percent.

Silver is found in all four major types of zinc deposits, which also yield gold, lead and copper, according to the International Zinc Association. Gold dropped 21 percent this year. Lead and copper fell 12 percent.

About 10 percent to 15 percent of zinc mine output is probably breaking even or losing money at current prices, according to Max Layton, an analyst at Goldman Sachs Group Inc. in London. The bank says prices will rise 10 percent in the next 12 months to $2,100. Silver will average $18 an ounce in 2014, or 11 percent less than yesterday’s price of $20.2801, Citigroup says.

Growth in refined zinc production will slow to 2.8 percent next year from 3.9 percent in 2013 as demand accelerates 5 percent from 4.1 percent, according to Barclays Plc. A survey showed four of 14 analysts expect consumption to exceed smelter output this year and another five in 2014.

Construction will account for 50 percent of the 13.36 million tons consumed in 2013, and transport another 21 percent, HSBC estimates. Both industries use galvanized steel sheet, which reached a record 35.3 million tons in the second quarter, according to Macquarie Group Ltd.

While zinc stockpiles monitored by the LME fell 13 percent to 1.06 million tons this year, they are still about double the 10-year average. Inventory around the world is closer to 3 million tons, according to Wood Mackenzie Ltd., a research company in Edinburgh. That’s almost three years of U.S. demand. Macquarie says China’s zinc mine supply will grow about 8 percent this year.

“We still see the market in surplus even if those surpluses are more modest than we experienced in prior years,” said Andrew Shaw, head of industrial metals research at Credit Suisse Group AG in Singapore. The surplus anticipated in the Bloomberg survey for 2013 would be the seventh consecutive year of oversupply, according to the Lisbon-based International Lead & Zinc Study Group.

As little as 40 percent of LME-tracked stockpiles may be available to consumers because the rest is tied into financing deals, Societe Generale SA says. The transactions typically involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts for later delivery cost more than nearer-dated supply.

Even if consumers can buy the metal, lines at warehouses can stretch to months. About 84 percent of LME-tracked zinc is held in New Orleans, Antwerp and Vlissingen in the Netherlands, creating congestion at storage sheds, bourse data show. Orders to withdraw metal rose almost fourfold in a year.

Zinc premiums in Europe are the highest since November 2011 and are mirroring increases in the aluminum market. A U.S. Senate subcommittee on July 23 heard complaints from the beverage industry that banks and other warehouse owners are manipulating aluminum supplies and slowing deliveries to drive up the price.

The average U.S. home probably contains more than 40 kilograms (88 pounds) of zinc, from door handles to sinks to heating ducts to screws, according to the International Zinc Association. The average North American car has 16 pounds of the metal, the Durham, North Carolina-based industry group estimates.

Terramin Australia, based in Adelaide, said July 5 it will close the Angas zinc mine in southern Australia by the end of September because the new ore discoveries aren’t profitable at current prices. Yukon Zinc, based in Vancouver, said June 27 it would cut output and staff at its Wolverine operation in Canada to reduce costs, citing declines in zinc and silver prices.

Glencore Xstrata Plc (GLEN), the biggest zinc miner, closed Brunswick in Canada in April after it ran out of profitable ore and said in May that the Perseverance mine would wind down in the second quarter. The Baar, Switzerland-based company got 26 percent of revenue from metals and minerals last year, according to data compiled.

“With lower silver prices the cost has gone up for some zinc miners,” said Bart Melek, the head of commodity strategy at TD Securities Inc. in Toronto and the second-most accurate zinc forecaster tracked over the past two years. “That will put more pressure on the zinc price to go up.”